Steve Ballmer wasn't kidding when he said he wanted Microsoft to be a devices company.

Over the years, Microsoft has bought many companies. Traditionally, they've been software companies. Software is, after all, Microsoft's thing. It's in the name. Nokia, however, is a hardware company. It designs and builds phones, and that's a huge departure from Microsoft's traditional business.

Historically, this is anomalous. The many companies that Microsoft has bought have been almost all software companies, or at least online service providers. But it's entirely consistent with outgoing CEO Steve Ballmer's repositioning of the firm as a devices and services company. It makes it clear that Ballmer, at least, is very serious about the devices business; Surface isn't an experimental misadventure, it's the first step in the evolution of the company.

Unsurprising because the two companies have been working closely together since 2011, with Nokia essentially committing entirely to Windows Phone as its smartphone platform. A purchase has long been seen as the next logical step, and for many, it has been a question not of if, but of when.

Nonetheless, the fact that Microsoft had finally gone ahead and done it was surprising. Why do it, and why now?

The official argument

Microsoft's case for the purchase is straightforward. Microsoft wants to make consumer goods, because consumer goods are influential over the enterprise space. If your company makes routers or multimillion dollar storage systems, sure, a consumer presence doesn't matter. But for PCs, tablets, smartphones, communications software, office productivity, and related technologies, it's clear that success in the consumer sphere can drive success in the enterprise sphere. Ceding the consumer space limits enterprise success.

As for why Redmond wants to build smartphones rather than merely develop their software, that too is straightforward. The company says that it has a gross margin of less than ten dollars per Nokia Lumia device under the current partnership. Post-purchase, the company reckons it will make a gross margin of over 40 dollars per handset. $40 per device sold is obviously a lot better than $10 per device sold. The new vertically integrated organization will, it says, save $600 million a year in "synergies," and break even with sales of about 50 million handsets a year.

So far, so feasible. Windows Phone is on track for around 35 million sales this year, and the majority of those should carry the Lumia brand. Nokia has backed Windows Phone in a way that HTC and Samsung haven't, with a wide range of devices available at just about every price point. Combining striking looks and some unique technology, Nokia's approach looks like it may be starting to work out. 50 million is within reach, with IDC forecasting 170 million Windows Phone shipments in 2017.

As rationales go, there's nothing wrong with this argument. We've argued before that Microsoft should build its own phones because it's better to make (say) a 15 percent margin on a $300 piece of hardware than a 75 percent margin on a $30 piece of software bundled with that hardware.

Previously we were concerned about the chilling effect that Microsoft-brand phones could have on the other Windows Phone OEMs. That's not a problem any longer. Microsoft says that it will continue to license Windows Phone to other OEMs, but at this point it's hard to see how either the OEMs or the buying public will care. They don't right now.

The money argument is certainly important. When Microsoft first announced the Nokia partnership, some commentators said that Redmond had essentially bought the phone maker for $0—Nokia became dependent on Microsoft, with Microsoft's decisions setting Nokia's direction.

But that is only true when Nokia isn't making money off Windows Phones. When Nokia's phone division loses money, Microsoft still gets its $10 or so margin, and Nokia has to foot the bill for the losses. If, however, it starts making money, Microsoft doesn't get a cent of it. It's stuck with its $10 per handset, leaving Nokia to make tens or hundreds of dollars per phone. To get that money, you need to make the hardware, which makes purchase better than partnership.

However, while the rationale makes sense, and is important, it doesn't really answer all the questions about the deal.

The parts left behind

The first peculiarity is what Microsoft did and didn't buy. Three Nokia divisions are remaining with Nokia: telecoms equipment manufacturer Nokia Solutions and Networks, mapping division HERE/Navteq, and Advanced Technologies, which develops and licenses telecoms-related intellectual property. Leaving NSN is unsurprising; it has no meaningful overlap with any of Microsoft's interests.

Instead of buying Advanced Technologies, Microsoft has bought licenses to many of its patents. This also makes some sense, as it allows Advanced Technologies to pursue legal action against those infringing on its patents without substantially opening itself up to retaliatory action. NSN might still be a target, but a lesser one than the smartphone business.

HERE, however, would on the face of it appear to be a sensible acquisition. Mapping and location data is critically important to smartphone platforms—it's not for nothing that Apple has moved its mapping in-house rather than licensing it from Google. The HERE-powered apps on the Lumia devices are generally compelling, useful applications that make Nokia's Windows Phones more desirable than those from HTC and Samsung. Microsoft already licenses Navteq data for Bing Maps and Streets and trips/AutoRoute, and the photo cars that collect street view imagery sport both Bing and Navteq branding.

Given this extensive use and broader strategic importance, it seems a little surprising that Microsoft didn't toss a few billion more dollars at the Nokia board to grab HERE too.

Update: This post citing anonymous sources says that Microsoft did indeed want HERE, but that the Nokia board refused to sell it. It's still remarkable that no deal could be struck.

On the flip side, Microsoft isn't just buying Nokia's smartphone business; it's also buying the dumbphone business (and its Asha brand) too. Nokia's dumphone business is huge, but declining. Nokia's long-term ambition was to convert these Nokia Asha users into Lumia users. With common(ish) styling between the ranges and the Nokia brand name spanning both Asha and Lumia phones, the company may well have been able to win some converts.

Post-purchase, however, that's going to be rather more difficult. That's because Microsoft isn't buying the right to use the Nokia brand name on any future smartphones. Future Asha devices will still be able to wear the Nokia brand, but future Lumias will not. The continuity and name recognition that Nokia once counted on won't exist.

It's hard to imagine that Microsoft has any real interest in Nokia's dumbphone business, and with the original long-term migration plan disrupted by the purchase, why buy it? It might well be the case that it's simply too inextricably linked to the smartphone business to pick up one without the other. Long term, however, it plainly has no future.

I hope Elop is the next CEO. The Lumia handsets are the only exciting thing with Microsoft's name on it right now. They completely upstage Windows Phone OS. If its the other way around and Microsoft ruins Nokia, well... That would be sad.

I see this acquisition working if it means that Microsoft adopts the qualities that Nokia had in its Windows Phone adventure: a hunger to stay alive and a fast release cycle. I however see this acquisition failing horribly if instead what was once Nokia becomes more like Microsoft, bogged down in politics and in-fighting. So much depends on whether or not Ballmers reorganization proves successful.

I certainly hope it does, because I love my Lumia 920 and I think WP as a product deserves to be successful and has a ton of potential, yet I'm kind of disappointed how little seems to have happened to WP8 this past year. I've gotten two updates which added some nice features, which would have been fine if WP was where Android is now but it isn't and WP needs to move faster and more aggressively.

I'm trying to see how this is going to change anything. History says everything hardware wise at MS has failed or wasn't that big of a success.

About the only long term successful hardware MS has made are keyboards and mice.

How is the Xbox not a long term success? I don't have the financial figures at hand, but MS has been making Xboxes for years and they haven't given up on it like the whole Danger/Kin debacle. That's not exactly a ringing endorsement of the Xbox business obviously, but it says something that they're sticking with it after however many years.

Surface was obviously a learning experience for MS in hardware manufacturing. If they take away the appropriate lessons from Surface they could conceivably turn out some very compelling products in the near future, regardless of the Nokia purchase.

And, at a moment in time like this, it's fun to go back and read Ballmer's comments on what a flop the original iPhone was going to be. How things change.

I'm trying to see how this is going to change anything. History says everything hardware wise at MS has failed or wasn't that big of a success.

About the only long term successful hardware MS has made are keyboards and mice.

If you ignore their 2.5 billion in profits per quarter from the highly successful XBox series, I guess that might be true.

Hardware is not something new to Microsoft. They almost single handedly brought the mouse to PCs way back when mice were a new idea, and as you pointed out they have been selling PC peripherals ever since. They haven't always been so successful with hardware products, but their failures have rarely if ever been due to the quality or design of the hardware itself. Even the ill fated Zune's hardware received positive commentary from nearly everyone.

Maybe I'm being one dimensional, but I think this is too little, too late. The smartphone OS war is basically over. iOS and Android are duking it out for top honours, Blackberry are heading down the gurgler rapidly. The best MS can do is a distant third.

Ballmer and MS totally misread the consumer smartphone and tablet markets, and are now scrabbling (and failing) to catch up. Maybe they should just let it go, and concentrate on what they are good at (Windows/Office, Corporate/Enterprise)?

I'm curious with regard to "50 million handsets a year .. within reach" and and "170 million shipments in 2017" - who will buy them? Here in Australia I have never seen a Windows Phone outside of a telco shop. Not once.

Microsoft is going to dump the dumbphone division and wipe the gunk from their fingers the instant the deal closes.

And honestly, the evolution of phones had led us to the point where there is really no reason for a western company to fool with dumbphones. Let the Chinese bottom-feeders have that market.

Apart from selling cheap phones to the mass market and thus spreading brand name recognition? There's a lot of economic potential within developing regions such as LatinAmerica where the Blackberry is king.

Should Elop get the job, he might also struggle to displace accusations of being the "Manchurian CEO;" joining Nokia with the express intent of weakening it so that Microsoft could buy it at a knock down price. Advocates of this theory never do a good job of explaining why Microsoft would want to weaken and then buy Nokia—if Nokia were once more a booming success then by implication so too would be Windows Phone, which is surely the best outcome for Redmond—but coherent explanations have never been too important to conspiracists.

It is actually very simple to explain. Windows phone was always going to lose tons of money attempting to build up market share, because building smartphones at lower volumes is expensive. Microsoft got Nokia to do this for the last few years at the cost of its own mid range phones (which were profitable). Now Microsoft gets to buy the division with a steep discount in stock price due to the sunk costs that Nokia has put into the enterprise. Going forward if things turn around Microsoft gets to keep the profits, and regardless of what we all think, Microsoft clearly thinks things are going to improve.

I am somewhat shocked that I would have to explain this to you, as I would think this narrative would come naturally to someone such as yourself, that seems to be so comfortable in the style of Sunday British journalism.

Maybe I'm being one dimensional, but I think this is too little, too late. The smartphone OS war is basically over. iOS and Android are duking it out for top honours, Blackberry are heading down the gurgler rapidly. The best MS can do is a distant third.

Ballmer and MS totally misread the consumer smartphone and tablet markets, and are now scrabbling (and failing) to catch up. Maybe they should just let it go, and concentrate on what they are good at (Windows/Office, Corporate/Enterprise)?

I'm curious with regard to "50 million handsets a year .. within reach" and and "170 million shipments in 2017" - who will buy them? Here in Australia I have never seen a Windows Phone outside of a telco shop. Not once.

They are most popular across Europe, but are becoming very popular in Mexico right now as well. I know what you mean though, I live in Canada and I have only seen a few, including mine.

Advocates of this theory never do a good job of explaining why Microsoft would want to weaken and then buy Nokia—if Nokia were once more a booming success then by implication so too would be Windows Phone, which is surely the best outcome for Redmond—but coherent explanations have never been too important to conspiracists.

Indeed. Sometimes the truth is far more mundane and well, even the mighty Redmond juggernaut couldn't control the mobile market enough to stop Google and Apple from taking over.

But what if Elop really was a Trojan horse but not for Microsoft, but for Nokia? If he becomes CEO, he could change the focus of the company towards putting mobile devices and services first, the PC and enterprise markets receiving less attention.

He makes Nokia the most successful Windows Phone OEM, makes Lumia a catchy brand, gets Microsoft to acquire Nokia, and then he becomes Microsoft CEO - so Nokia now controls Microsoft!

Maybe I'm being one dimensional, but I think this is too little, too late. The smartphone OS war is basically over. iOS and Android are duking it out for top honours, Blackberry are heading down the gurgler rapidly. The best MS can do is a distant third.

Ballmer and MS totally misread the consumer smartphone and tablet markets, and are now scrabbling (and failing) to catch up. Maybe they should just let it go, and concentrate on what they are good at (Windows/Office, Corporate/Enterprise)?

I'm curious with regard to "50 million handsets a year .. within reach" and and "170 million shipments in 2017" - who will buy them? Here in Australia I have never seen a Windows Phone outside of a telco shop. Not once.

I can only assume you've never caught the train then. When I fired up my Surface Pro on the train this morning, top of the list of available WiFi networks were "Lumia920" and "NokiaWindowsPhone".

I see Windows Phones every day on the way to work. In my immediate family there are five windows phones (plus mine, the rest belong to my Mum, Dad, wife and two of my brothers). Within twenty metres of me at work there are five Windows Phones (plus two iPhones and a bunch of Android phones).

Windows Phone is certainly not as popular as any other platform, but in some countries it is fast gaining traction. I would expect that Australia is one of those countries, considering how many I see.

althaz: Out of curiosity, what city do you post from? Microsoft popularity seems to have been very regional.

Someone else said this in a similar story, but I'll just paraphrase: To assume that Microsoft had been planning some sort of degradation of Nokia through the planting of a CEO, and through market predictions...kind of makes the assumption that Microsoft can follow through on a complex and ingenious plan correctly. If you look at the Surface, Windows 8, and Xbox One launches (in the tertiary case, even before it launches)...you tend to get a different impression.

althaz: Out of curiosity, what city do you post from? Microsoft popularity seems to have been very regional.

Someone else said this in a similar story, but I'll just paraphrase: To assume that Microsoft had been planning some sort of degradation of Nokia through the planting of a CEO, and through market predictions...kind of makes the assumption that Microsoft can follow through on a complex and ingenious plan correctly. If you look at the Surface, Windows 8, and Xbox One launches (in the tertiary case, even before it launches)...you tend to get a different impression.

The last reports I read still showed the business as an overall loser over the 10 years MS has been at it.

Very true; though they probably would have broken even on the Xbox 360 if they hadn't had to shell out a few billion on the red ring of death. But overall, they lose money on all of their consumer products. All of them. Every year.

Which is why Microsoft needs to stop trying to be like Apple, and work harder to be like IBM. IBM is not a bad company; just a boring one. IBM is a well-diversified enterprise technology company. It's a stable business that provides stable dividends to its shareholders. Most importantly, Microsoft really, really sucks at the retail sales channel. Microsoft sells nearly all its products through reseller / partner channels.

Ballmer's ego wouldn't let him put the brakes on Microsoft's consumer products. From the looks of this most recent move, the board isn't going to stop whoever takes the company over either. But the "devices and services" path that Microsoft is on is a perilous one. I'm hoping that the activist investors swoop in on Microsoft and force their extra cash into dividends instead of continuing the insane spending on the consumer market products that really don't fit into the way Microsoft actually makes money.

It's hard to imagine that Microsoft has any real interest in Nokia's dumbphone business, and with the original long-term migration plan disrupted by the purchase, why buy it?

I'm sure Microsoft didn't want it, but what is the alternative? If they leave it with Nokia there are two options. First option, Nokia still has a phone business, like all phone businesses they go into smartphones, now they are competition. Why would Microsoft want that? Second option, as part of the deal Nokia promises to never make smartphones. Instead, Nokia is stuck with a dying division that is going to waste money and attention. Why would Nokia agree to that deal? I think it was just simpler to buy the dumbphones. Probably Microsoft will drop them pretty quick anyway.

The Nokia acquisition makes perfect sense. In industrialized countries phones are an integral part of our lives and will be more so 10 years from now. They produce a ton of data that needs to be rerouted to either the cloud or the desktop for storage or further processing.

Microsoft not owning a piece of that pie would have had disastrous consequences. One may question the timing, the price and the deal but the long term view clearly requires that the Lumia brand thrives one way or another. The cost of *not* doing so would be probably 10 times higher than the acquisition price.

I'm trying to see how this is going to change anything. History says everything hardware wise at MS has failed or wasn't that big of a success.

About the only long term successful hardware MS has made are keyboards and mice.

If you ignore their 2.5 billion in profits per quarter from the highly successful XBox series, I guess that might be true.

You are confusing revenue for profits. They made 340 million in profit, not 2.5 Billion. Which is drop in the bucket compared to the billions they sunk trying to make this business profitable.

It is profitable now, but it is questionable whether all the billions they have pumped in through the money losing years have been made back.

The last reports I read still showed the business as an overall loser over the 10 years MS has been at it.

SciFiGeek, you are contradicting yourself. $340M profit in a quarter against "billions" in investment over the years is not a "drop in the bucket" because it adds up to "billions" in profit over just several years.

The fact is Xbox has successfully fended off Sony's domination in living room, is and will continue to make very good money for Microsoft in the future. It's definitely a "long term successful hardware" Microsoft has produced.

According to the New York Times (quoting anonymous sources), Microsoft wanted the mapping division, but Nokia refused to make it part of the deal. Microsoft was apparently eager enough to do the deal that it made that concession.

BTW, Ben Thompson makes an interesting argument that Microsoft is setting itself up for failure by trying to be all about "devices and services," because he believes those ultimately require different strategies. If you're a device company, you want your services on your own devices to differentiate them from others. If you're a services company, you want to provide your services to everyone's platforms in order to make the services ubiquitous. He thinks the parts of the company will continue to fight each other because of this. His analysis makes sense to me, but we'll have to see how it works out.

The Nokia acquisition makes perfect sense. In industrialized countries phones are an integral part of our lives and will be more so 10 years from now. They produce a ton of data that needs to be rerouted to either the cloud or the desktop for storage or further processing.

Microsoft not owning a piece of that pie would have had disastrous consequences. One may question the timing, the price and the deal but the strategy clearly required that the Lumia brand thrives. The price of *not* doing so would be probably 10 times costlier than the acquisition price.

If you're a big company and you can't be #1 or #2 in a market, you shouldn't be in the market.

Microsoft will never be #1 or #2 in the smartphone market. They missed the mobile/tablet boat when they let Windows Mobile stagnate at version 6.5 for half a decade. It's already too late.

They should exit consumer products altogether and focus on the enterprise where they're actually really good. There's a gaping hole in enterprise BYOD mobilization; Microsoft should exploit that as their mobile play.

It's hard to imagine that Microsoft has any real interest in Nokia's dumbphone business, and with the original long-term migration plan disrupted by the purchase, why buy it?

I'm sure Microsoft didn't want it, but what is the alternative? If they leave it with Nokia there are two options. First option, Nokia still has a phone business, like all phone businesses they go into smartphones, now they are competition. Why would Microsoft want that? Second option, as part of the deal Nokia promises to never make smartphones. Instead, Nokia is stuck with a dying division that is going to waste money and attention. Why would Nokia agree to that deal? I think it was just simpler to buy the dumbphones. Probably Microsoft will drop them pretty quick anyway.

I agree with your premise and I'd add one more thing. If Nokia were to keep the dumbphone business and agree not to do smartphones, who gets to define what a smartphone is? The line isn't as cut and dried as it used to be. But since Nokia can start making phones again at the beginning of 2015 (if I remember the date correctly), nobody has to define what a smartphone is. They just have to look at the calendar. (As a side point here, it will be very interesting to see whether Nokia starts making phones again in a couple of years.)

BTW, Ben Thompson makes an interesting argument that Microsoft is setting itself up for failure by trying to be all about "devices and services," because he believes those ultimately require different strategies. If you're a device company, you want your services on your own devices to differentiate them from others. If you're a services company, you want to provide your services to everyone's platforms in order to make the services ubiquitous. He thinks the parts of the company will continue to fight each other because of this. His analysis makes sense to me, but we'll have to see how it works out.

I agree with him 100%. They're playing "me too" on the devices front by releasing products into a saturated market that they're not a part of. They'd probably be better off releasing an Android device at this point than a Windows RT device.

I like Microsoft and I want to see them do well. But their strongest markets are all B2B and the current focus of the company is on B2C.

If you're a big company and you can't be #1 or #2 in a market, you shouldn't be in the market.

That's what experts told HP when it entered the printer market and were number #6 after massive R&D investments and five years of losses. IBM dominated the market by so much that everybody thought their business was inexpugnable. DEC and a bunch of now defunct companies were competing with IBM. Japanese firms such as Epson dominated the low-cost, dot-matrix printer. HP was sandwiched between the enterprise printers and the low-cost printers. No one thought they could survive.

They should exit consumer products altogether and focus on the enterprise where they're actually really good. There's a gaping hole in enterprise BYOD mobilization; Microsoft should exploit that as their mobile play.

Windows (desktop) is as much a consumer product as it is used in the enterprise. Microsoft is trying to position WinRT and WP also in that middle ground. Whether the Windows model can be exported to the tablet and phone is yet to be seen. What is _not_ yet to be seen is Microsoft's persistence so who knows. A lot can happen between now and 2016.

Any guess on why MS didn't/couldn't license the Nokia brand for smartphones? I read that Ballmer wants to simplify the product names but...

Also the deal states Nokia is free to make their own "mobile devices" after 30 months. I thought that was pretty interesting. It seems like there are something other than smartphones they have been working on and want to make product out of it in the future.

Advocates of this (conspiracy) theory never do a good job of explaining why Microsoft would want to weaken and then buy Nokia—if Nokia were once more a booming success then by implication so too would be Windows Phone, which is surely the best outcome for Redmond—but coherent explanations have never been too important to conspiracists.